Finland's tax on low-carbon power

Wednesday, 1 April 2009

Nuclear and hydro power plants in Finland are to be taxed to reduce company profits that result from competitive operation in a market with carbon trading.

 

A cabinet decision yesterday will lead to a government proposal for a 'windfall' tax on all low-carbon generating capacity built before the Kyoto Protocol of 1997. This will touch on the profitability of all four nuclear power units now operating in the country.

 

Exceptions to the state tax will be the forms of power currently promoted by government: wind power, small hydro and combined heat and power.

 

Loviisa 1 and 2 should partially avoid the tax due to upgrades made after the 1997 Kyoto Protocol   Nuclear taxes Taxes on hydro and nuclear power are not new in the Nordic region. In Sweden, hydro plants must pay the real estate tax, while a capacity-based tax applies to nuclear power plants. Norway has no nuclear power, but this year the hydro industry that provides over 90% of electricity has to pay taxes equivalent to 30% of former profits.   In Belgium, Electrabel is fighting a government move to force nuclear operators to pay a €250 million 'contribution' to the state budget. The government says this is not a tax, but Electrabel disagrees and in recent days has launched an appeal to the Belgian constitutional court over the matter.

Finland's nuclear power comes from two sites: Loviisa, which is owned by Fortum and features two reactors, and Olkiluoto, owned by Teollisuuden Voima Oyj (TVO) with another two units. All the reactors were built before 1997, but upgrades made after the Kyoto Protocol have led to capacity increases of 90 MWe at Loviisa and 424 MWe and Olkiluoto. The wording of government statements indicates this capacity will avoid the tax, as will new nuclear projects such as Olkiluoto 3 and any future reactors.

 

Nevertheless, the Finnish government said that applying a tax of between €1 and €10 per MWh to the 2182 MWe of original nuclear capacity as well as about 3000 MWe of hydro will bring in between €33 million and €330 million per year.

 

Rationale

 

Nuclear and hydro share several similarities apart from both being low-carbon. Among these are reliability, predictability and low marginal cost as key operational benefits. However, these qualities have been cited as the main reasons for imposing the new tax.

 

The Finnish government said that the price of power in the Nordic market varies according to the cost of extra power production at the most expensive plant. "In a system based on marginal cost pricing, production technologies with lower prices, hydro and nuclear power in the Nordic market in particular, produce significant economic advantages."

 

The government said that this advantage, together with the fact that nuclear and hydro plants avoid the varying costs of carbon trading in the EU's Emissions Trading Scheme, had resulted in "unearned income."

 

Fortum reacted quickly, stating: "The very idea of the emissions trading scheme was to direct investments to emissions-free power production. The emissions cost is a steering mechanism; producers who emit will pay and producers who don't will benefit. A special hydro and nuclear tax would work against that idea and would, in fact, punish CO₂-free production."

 

The company also said that the tax "would increase production costs and thus electricity prices," but the government denied the tax would have a "direct influence" on prices.